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Expat Briefing Editorial Team
09 April, 2015
The tax status of (usually well-heeled) long-term foreign residents in the United Kingdom hit the headlines again recently as the opposition Labour Party pledged to abolish the non-domicile tax rules if its wins the general election on May 7.
At least, that seemed to be the message when Labour leader Ed Milliband mentioned the issue during a speech at Warwick University in April 2015. However, we can't be totally sure what Labour's intentions are. The calculatedly-vague language used by Milliband suggested that Labour would change the tax rules in some way to ensure that more foreigners pay tax in the UK, rather than do away non-dom status altogether.
"Our principle is simple," says Labour on its website. "Everyone should play by the same rules. If you make the UK your home, you should pay full UK tax on your whole income – just like most people who live in the UK currently do. The only exemptions should be those who are genuinely resident in the UK on a temporary basis – like students, or people living here for a short time on business."
The policy is however, very short on detail. What's more, the waters were muddied further when the governing Conservative Party dredged up an interview given in January 2015 by Labour Treasury spokesman Ed Balls in which he said that scrapping the non-dom tax rules would result in a net loss for the Exchequer.
It is actually misleading to suggest, as many politicians and commentators do, that the non-dom rules are a special tax break created to benefit only rich foreigners, as, in theory, Britain's tax residence rules apply to everyone. So foreigners, irrespective of their level of wealth, who are resident in the UK, but not domiciled there (put simply, not born in the UK nor a permanent resident there) do not pay UK tax on foreign income as long as it is not remitted to the UK. It just so happens that for foreign business owners and executives, these tax rules make the UK an attractive place to be based. And of course, they still have to pay tax on UK income and capital gains, just like everybody else resident in Britain.
In actual fact, rules are already in place designed to make claiming non-dom status somewhat less attractive and more expensive for people of means. In 2008, with the then Labour Government facing a fiscal crisis, a GBP30,000 charge was introduced for the privilege of claiming non-dom status. The 'Con-Lib' coalition elected in 2010, despite their repeated assertions (mainly from the Conservative side) that Britain is "open for business," took the concept of the remittance basis charge and ran with it. After several changes to the rules in successive budgets, the so-called "non-dom levy" is now charged at GBP30,000 for those UK resident for seven of the past nine years, GBP60,000 for those UK resident for 12 of the last 14 years, and GBP90,000 for those who have been UK resident for 17 of the last 20 years, with the GBP90,000 charge introduced at the 2014 Autumn Statement.
The perception remains among the public at large (a perception often encouraged by some politicians) that the non-dom rules basically reward the idle rich for keeping their millions and billions parked in offshore tax havens. Labour also says that the rules are abused and that "hundreds of millions of pounds in additional tax revenues" will be raised by closing down this "loophole." But tax revenue statistics suggest that non-doms pay more in tax to the UK Treasury than they take out. Non-doms are also said to make a considerable indirect contribution to the coffers, and the wider economy, through the jobs they create in the UK, although figures aren't readily available to back up these claims.
According to international law firm Pinsent Masons, non-doms paid GBP6.18bn in income tax in 2012-13 and GBP223m in the remittance based charge in 2012-13. Non-doms also pay significant amounts in capital gains tax and transactional taxes such as value-added tax, says the firm.
"Non-doms are often portrayed as a group who exploit loopholes to pay little or no tax. In fact they make a significant contribution to the Exchequer," said Paul Noble, Tax Director of Pinsent Masons. "They have huge spending power, invest in UK businesses and the capital they deploy creates thousands of jobs in the UK. There are plenty of other countries competing to welcome these non-doms to their shores."
Responding to Labour's attack on those claiming non-dom status, Noble warned: "If UK taxes on non-doms are increased then at the very least they are very likely to review their exposure to UK taxes and how their assets are held."
"Those with deep roots in the UK are less likely to relocate elsewhere. However the biggest impact may be on the UK's ability to attract new entrepreneurs, senior executives and other High Net Worths into the UK," he added.
Figures suggest that those with looser ties to the UK are already leaving because of the non-dom levy. According to Pinsent Masons, while the increase in the non-dom levy brought in GBP35m extra in 2012/13, the number of people claiming non-dom status in the UK fell from 139,000 in 2007/08 to 110,700 in 2012/13. Or perhaps many previously claiming non-dom tax status no longer think it's worth the hassle anymore.
Geoffrey Todd, Partner at law firm Boodle Hatfield thinks that the UK tax system might actually benefit if these increasingly complex rules were scrapped. On the other hand though, he cautions that such a move would be a "fundamental" and little understood one.
"The favourable tax treatment of these so called 'non-doms' has long been a political hot potato and the benefits have been significantly eroded in recent years, particularly with the introduction of an annual charge in order to keep foreign income and gains kept abroad outside the UK tax net and with the tightening up of the taxation of offshore trusts. However, the abolition of the concept altogether would be a fundamental change to the UK tax system."
"On a positive note, the tax rules which apply to non-doms are now very complicated, and abolishing them altogether may help make the taxation system much simpler."
"However, there would be exceptions even under the new proposals, which will bring their own complications. For instance, it has been suggested that rules would be put in place so that temporary residents such as students and foreign workers seconded to the UK for a short period of time would only be taxed on UK earnings and there may be a short transitional period for current non-doms to enable them to sort out their tax affairs."
"The economic benefits of the proposals are uncertain. Part of the rationale for the beneficial tax regime is that it encourages foreign investment in the UK from overseas and non-doms do pay tax in the UK often in substantial amounts. There is a danger that the changes could deter overseas investors from settling and investing in the UK and ultimately decrease the tax collected from these individuals rather than raise extra funds. Domicile is a fundamental concept of the UK tax system and our tax rates and reliefs have been set to reflect the fact that we make a distinction between residence and domicile. Consequently abolishing the whole concept would be something of a leap in the dark with the economic effects unknown."
So what of the future for those claiming, or thinking of claiming, non-dom tax status in the UK? We can't answer that with much certainty. A lot will hinge on the identity of the next Government. It would appear that Labour, possibly in a left-wing coalition with the Scottish Nationalists, would probably further restrict these rules. But given their recent history of tinkering with the tax residency rules since being in power, the possibility of further change cannot be excluded even if the Conservatives, who think non-doms benefit Britain overall, are returned to power.
The reality is that non-dom bashing does strike a chord with the many voters who have little choice about how much tax they pay. Therefore the 2015 general election will be one of the most keenly watched in modern times by non-doms, as well as expats in the UK in general.
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